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Market Watch: January 29

Jan 29, 2021 | 3:06 PM

Big Picture

Markets Stumble Over Disappointing Vaccine Rollout, Slowing U.S. Recovery

Although it hasn’t been a stellar week for markets thus far, the Nasdaq and S&P 500 got off to a solid start in Monday trading, climbing to new highs amid sharp swings in key tech names. The delays in the vaccination rollout, and the rise of new variants of the virus, have helped fuel recent gains in tech stocks, which benefit from ongoing lockdowns. By Monday’s close, the Nasdaq gained 92 points, the S&P added 14, while the Dow shed 37. In Canada, the TSX was up 60 points, buoyed largely by the tech sector.

U.S. stocks closed slightly lower on Tuesday, weighed down by travel and transportation names, which have been punished as disappointment over the speed of vaccinations mounts. While the day’s losses in U.S. markets were fairly negligible, the TSX fell by 126 points in a broad-based decline led by the energy sector, which fell 3.7 per cent.

Markets had an especially tough session on Wednesday, as indexes suffered their sharpest one-day losses since October. It was an especially volatile day, with the Dow tumbling more than 600 points, the S&P dropping 100, while the Nasdaq and TSX both shed 355 points. By Wednesday’s close, the TSX had surrendered all its 2021 gains.

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One emerging story this week has been the frenzied trading taking place over a handful of stocks, especially video game retailer GameStop and movie theater chain AMC Entertainment. GameStop, in particular, has been at the center of a fight between bullish day traders, who’ve organized on the internet forum Reddit, and key hedge funds, which have bet heavily against the stock. The buying pressure from retail investors has driven up GameStop’s share price dramatically and led to a short squeeze, which has resulted in large losses for some hedge funds – and a wider selloff in unrelated stocks, as some traders scramble to cover their short positions.

The mania abated somewhat Thursday, however, as some trading platforms restricted trading on certain stocks, including GameStop and AMC. Finally, N.A. stocks regained ground Thursday in a broad-based rally — highlighted by health care, technology and financials – as investors looked for buying opportunities after Wednesday’s sharp selloff. By Thursday’s close, the Dow had climbed 300 points, while the S&P and Nasdaq added 36 and 66, respectively. In Canada, the TSX added 232 points.

N.A. Markets Lose Ground

For the four trading days covered in this report, the Dow plunged 394 points to close at 30,603, the S&P 500 dropped 54 points to settle at 3,787, while the tech-heavy Nasdaq lost 206 points to close at 13,337. In Canada, the TSX surrendered 189 points to end at 17,657.

Strategy

The Canadian economy showed some unexpected strength to end 2020, despite a resurgence of COVID-19 cases and a retightening of restrictions.

Output grew 0.7 per cent in November, on a month-over-month basis, topping consensus estimates for growth of 0.4 per cent and accelerating from October’s 0.4 per cent pace. Further, preliminary guidance from Statistics Canada shows the economy grew 0.3 per cent in December, defying expectations for a contraction. Growth in 4Q was 1.9 per cent above the prior period, the agency said, which is well above expectations for the final three months of the year, but output fell 5.1 per cent for the year. Outside of sectors specifically affected by the virus, the economy appears to be faring well.

Overall, goods-producing (+1.2%) and services-producing (+0.5%) industries were up, as 14 of 20 industrial sectors posted gains in November. The likes of accommodation, food services, and entertainment related industries understandably lagged again in November, and we expect this underperformance to persist. Looking ahead, the hand-off to 1Q is markedly better than previously expected, though our base case is for a modest contraction before improving outcomes bear through in 2Q.

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